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Exam 21: International Corporate Finance

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Question 21

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You just returned from some extensive traveling throughout the Americas.You started your trip with $20,000 in your pocket.You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela.Then on the way home,you spent 47,500 pesos in Mexico.How many dollars did you have left by the time you returned to the U.S.given the following exchange rates? (Note: Multiple symbols are used to designate various currencies.For example,the U.S.dollar is notated as "$" or as "USD".)

A) 1,113 USD
B) 3,535 USD
C) 4,117 USD
D) 4,244 USD
E) 7,408 USD

F) A) and E)
G) A) and D)

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Question 22

Multiple Choice

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Assume the spot exchange rate for the Hungarian forint is HUF 215.Also assume the inflation rate in the United States is 4 percent per year while it is 9.5 percent in Hungary.What is the expected exchange rate 5 years from now?

A) 269
B) 276
C) 281
D) 294
E) 299

F) B) and E)
G) A) and D)

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Question 23

Multiple Choice

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Lakonishok Equipment has an investment opportunity in Europe.The project costs €12 million and is expected to produce cash flows of €2.7 million in year 1,€3.1 million in year 2,and €2.8 million in year 3.The current spot exchange rate is $1.3/€.The current risk-free rate in the United States is 5 percent,compared to that in Europe of 3.5 percent.The appropriate discount rate for the project is estimated to be 18 percent,the U.S.cost of capital for the company.In addition,the subsidiary can be sold at the end of three years for an estimated €6.5 million.What is the NPV of the project?

Where does most of the trading in Eurobonds occur?

You are considering a project in Poland which has an initial cost of 275,000PLN.The project is expected to return a one-time payment of 390,000PLN four years from now.The risk-free rate of return is 4.5 percent in the U.S.and 3 percent in Poland.The inflation rate is 4 percent in the U.S.and 2 percent in Poland.Currently,you can buy 277PLN for 100USD.How much will the payment of 390,000PLN be worth in U.S.dollars four years from now?

Which one of the following statements is correct concerning the foreign exchange market?

The price of one Euro expressed in U.S.dollars is referred to as a(n) :

A large U.S.company has £500,000 in excess cash from its foreign operations.The company would like to exchange these funds for U.S.dollars.In which of the following markets can this exchange be arranged?

George and Pat just made an agreement to exchange currencies based on today's exchange rate.Settlement will occur tomorrow.Which one of the following is the exchange rate that applies to this agreement?

Assume the spot rate for the Japanese yen currently is ¥99.31 per $1 and the one-year forward rate is ¥97.62 per $1.A risk-free asset in Japan is currently earning 2.5 percent.If interest rate parity holds,approximately what rate can you earn on a one-year risk-free U.S.security?

Triangle arbitrage: I.is a profitable situation involving three separate currency exchange transactions. II.helps keep the currency market in equilibrium. III.opportunities can exist in either the spot or the forward market. IV.is based solely on differences in exchange ratios between spot and futures markets.

You are analyzing a project with an initial cost of £130,000.The project is expected to return £20,000 the first year,£50,000 the second year and £90,000 the third and final year.There is no salvage value.The current spot rate is £0.6211.The nominal risk-free return is 5.5 percent in the U.K.and 6 percent in the U.S.The return relevant to the project is 14 percent in the U.S.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?

A basic interest rate swap generally involves trading a:

Which of the following variables used in the covered interest arbitrage formula are correctly defined? I.R_FC: Foreign country nominal risk-free interest rate II.R_US: U.S.real risk-free interest rate III.F₁: 360-day forward rate IV.S₀: Current spot rate expressed in units of foreign currency per one U.S.dollar

The camera you want to buy costs $230 in the U.S.How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists.

The LIBOR is primarily used as the basis for the rate charged on:

Assume that $1 is equal to ¥98 and also equal to C$1.21.Based on this,you could say that C$1 is equal to: C$1(¥98/C$1.21) = ¥80.99.The exchange rate of C$1 = ¥80.99 is referred to as the:

Relative purchasing power parity:

Describe the foreign currency and home currency approaches to capital budgeting for a foreign project.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869.The expected inflation rate in Norway is 6 percent and in the U.S.it is 3.1 percent.A risk-free asset in the U.S.is yielding 4 percent.What risk-free rate of return should you expect on a Norwegian security?